New Rule: 'Oversold' No Longer Equals 'Quick Bounce'

Stock market action had a 'bear market' feel to it Wednesday.

Many market pundits use an arbitrary definition that classifies a 10% pullback in an index as a "correction." Based on that rule the Dow Jones Industrial Average is now in a correction.

Regardless of the numbers the action had a "bear market" feel to it Wednesday. There was no real attempt at a bounce, but there were numerous intraday swings with the net result being a close near the lows of the day on negative breadth.

The big shift was that all those buyers that were so anxious to buy dips disappeared. Instead of salivating at the prospect of buying a stock at a lower price there was concern that it might not bounce again.

Facebook (FB) is probably the best illustration of this. Despite trading down close to 17% over the last nine trading days there is still great hesitancy to buy the dip. If in January, you had asked market players if they would be looking to buy Action Alerts PLUS holding FB on that sort of pullback you can bet that nearly 100% would have been ready to hit the buy button.

The main issue with the trading now is that it is lackluster. There are no pockets of strong momentum and less speculative chasing. The percentage of stocks that are trading over their 200-day simple moving average of price is now below 40%.

Normally we would hear lots of talk about the market being oversold. Oversold conditions have almost always led to quick bounces. That doesn't seem to be the case this time.

The good news is that new opportunities are being created. When markets correct like this, there isn't much distinction made between "good" or "bad" stocks. They are all sold but then eventually the market will start sorting them out. That is where the opportunity lies.

Start working on that buy list now.

Have a good evening. I'll see you tomorrow.

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At the time of publication, Rev Shark had no positions in the securities mentioned.

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